Don't lend money to a friend!!

sailinglegend

I have been trying to find some legal clarity to an unregulated loan I have given to a very good friend.

We lent £55,000, secured on his house through a solicitor and registered with the Land Registry. This was in 2008 and he offered to pay 10%. I thought that too high for him and we settled for 6.5% plus 7.5% of the increase in the agreed price of the property when it was sold. This agreement was for two years but at the last minute his solicitor added a clause to change to 1.5 % over base rate - and if the loan was not redeemed after two years the agreement would continue under the same terms. This was a major change to the original CH1 form we had agreed on, but it seemed reasonable, but within 9 months the rate had dropped from 5% to 0.5%. Because all this happened whilst we were away on an extended vacation and didn't follow the exchange rate changes we did not remember the last minute change from a fixed 6.5% interest rate to 1.5% over base. I did not advise him of a reduction of interest due, nor did he offer to pay less each month. 45 months out of 118 he has failed to pay any interest - but has advised each time that he could not afford to pay. When he did resume payments he never reduced the payments because the interest rate had reduced.

His solicitor is now claiming his continued payments at 6.5% were actually paying 2% interest - as per our agreement - and the rest going to pay of the principal balance. At no time did he advise where the Early repayment should be applied - as per the CCD regulations - nor did he ask if there was an early repayment charge.

If he had reduced his monthly payment or said he was paying at 2% when the interest rate fell then at the end of the first two year loan agreement I would have redeemed the loan - but I would have been happy to continue it with a rate of about 5%.

Does he have any legal claim after 11 years if we were both at fault bearing in mind the initial loan could have been redeemed by me after two years? We initially offered a compromise based on the 'statute of limitations' which he has rejected and we have now proposed a half way point which he has also rejected and he is now threatening court action. Threatening is one thing but it seems clear that would not be cost effective for him - but maybe for us?????

Our agreement simply said ... interest shall be paid thereon by the borrower at the variable rate of 1.5% over the base rate of the National Westminster Bank.....

He failed to do this which would have alerted me to the last minute change in our agreement.

I hope someone here may have some advise or suggestions where we both stand on any legal points

Don't lend money to friends is the obvious suggestion!

foxy-stoat

sailinglegend wrote: »

Don't lend money to a friend!!

Read that and thought - I know...and so does a lot of folk on here.

tacpot12

If I have understood your post correctly, your friend made monthly repayment sometimes paying 6.5% interest (which his solicitor rightly suggests are overpayments) and something paying no interest.

You merely need to put the loan into a loan amortization calculator that allows you to change the interest rate in line with the base rate being used and apply the payments he actually made. Neither of you needs to be concerned about whether interest was included in the payment. Interest accrues on the capital owed, and the payments made are always applied to the interest first, and only if there is a remaining amount of the payment that has not been used to pay the interest owed does the capital get reduced.

e.g. Mr. A borrows £1000 over 12 months at 4% interest and receives the loan on 1st Jan. The agreed repayment schedule is 12 monthly payments starting 1st Feb of £85.15, but they only makes their first payment on 15th Feb and pay less than the full amount, e.g. they pay £80.

Lender calculates the interest owed on 15th Feb as being 46 days interest (£4.95), they credit the rest of the payment £75.05 (£80 - 4.95) to repaying the capital meaning that Mr A now only owes £924.95.

If Mr A had paid £100 on 1st Feb when the first payment was due, the lender would have calculated the interest owed as 31 days interest (£3.33) and deducted this from the £100 and credited the rest of the payment £96.67 to repaying the capital so that Mr A only owes £903.33. The next time a payment is made, the lender will repeat the above process.

The borrower cannot decide how much of their payment is interest and how much is capital; it all applied to the interest that is owed at the point when the payment is made and any excess should always be applied to the capital. If the payment does not cover all the interest that it owed, the capital owed is increased by the interest that remains unpaid.

Only you have a legal claim on him for the money he owes - he has no legal claim on you. A court will expect to see your amortization schedule showing the interest rates applied to the loan and the payments made. The court will then be able to see how much your friend still owes you.

If you didn't agree an early repayment charge, you cannot charge one.

The statute of limitations (for you to sue him) runs from the last time he made a payment or acknowledged the loan, so don't leave it too late if you think he still owes you money.

You could not have redeemed the loan after two years as redeeming the loan means that you have paid the loan back. You would not pay back a loan to yourself. I sounds like you could have demanded repayment at the two year point but did not so the loan continues on its current terms - 1.5% over base rate - until the outstanding capital amount is repaid.

TrickyDicky101

sailinglegend wrote: »

Our agreement simply said ... interest shall be paid thereon by the borrower at the variable rate of 1.5% over the base rate of the National Westminster Bank.....

Is this exactly what is stated? The base rate of the National Westminster Bank is very likely to be much higher than the base rate of the Bank of England.

Unless specifically defined in detail this could ultimately be a significant point of contention in any legal proceedings you might bring.

thatcarguy

As much as we all want to help our friends out when they ask us, the sad reality is that we realise that a lot of people aren't that close of a friend as we thought.

Things can turn really ugly and sorry you found out the hard way.

Wish you all the best of your journey ����

sailinglegend

tacpot12 wrote: »

....I sounds like you could have demanded repayment at the two year point but did not so the loan continues on its current terms - 1.5% over base rate - until the outstanding capital amount is repaid.

The fact is both parties forgot the last minute change to a variable rate of 1.5% over base as numerous emails we have exchanged would suggest.

Without asking if overpayments were acceptable - could we now argue that his deliberate intention to continue paying the 6.5% amount could be considered deceitful because he would have known that asking to overpay, and hence payback the capital, would have meant we would have terminated the agreement?

tacpot12

sailinglegend wrote: »

...

Without asking if overpayments were acceptable - could we now argue that his deliberate intention to continue paying the 6.5% amount could be considered deceitful because he would have known that asking to overpay, and hence payback the capital, would have meant we would have terminated the agreement?

No I don't think you can - if early repayment was not possible, the agreement should have said this, and you should have returned any amount of overpayment when you received it, but you didn't. The repayment that was made (and that you kept) therefore has to be applied to the outstanding capital.

Did the agreement say that you could terminate it if he overpaid?

tacpot12

What did the agreement say about what would happen if the money was not paid back within two years?

Also when did your friend may the last payment on the loan?

glennstar

If you lend money to friends or family, consider it a gift and categorise anything you get back as a bonus - that way you won't be disappointed.

With reference the details of the case, I would suggest all the parties involved have done a pretty shoddy job of drawing up an agreement and the subsequent disagreement is inevitable. None of the parties seem to know (from what you say) what the difference is between the Bank of England base rate, LIBOR and the Official Bank Base Rate.

could we now argue that his deliberate intention to continue paying the 6.5% amount could be considered deceitful because he would have known that asking to overpay

Your animosity towards this person is now clouding what little judgement you have left. A judge/JP is not going to share your view. You put an unenforceable contract in place. It appears the borrower has broadly conformed to the terms (I might be wrong here - your explanation is garbled and confused) and now you want to take punitive action because it hasn't panned out in your favour.

I feel compelled to add that you might struggle to argue your point when "we were away on an extended vacation"... which would have been pretty extended given the factors involved.. suggesting you are likely far from the breadline.

STOP COMPLAINING!!

TripleH

Not being critical, just a point of clarification. Were you declaring the interest received on the loan to HMRC?

If not, this could come back and bite you, as the other party (if there has been a fallout) might use it to get back at you. If you were declaring, do you have evidence of what you declared and how it was calculated? When this whole situation has been resolved legally (assumed that is what will happen now) you will need to sort what was decided by a judge. If you have declared, you most likely would have overpaid tax.

phillw

sailinglegend wrote: »

I did not advise him of a reduction of interest due

sailinglegend wrote: »

At no time did he advise where the Early repayment should be applied - as per the CCD regulations - nor did he ask if there was an early repayment charge.

It's up to the lender to make sure all procedures are followed. I don't see how a court would let a lender benefit from failing to do something that they should have done. If anything I'd see him asking for all the interest to be wiped off.

sailinglegend wrote: »

The fact is both parties forgot the last minute change to a variable rate of 1.5% over base as numerous emails we have exchanged would suggest.

It's possible that you could argue the contract didn't reflect what you both thought you had agreed to

https://en.wikipedia.org/wiki/Meeting_of_the_minds

The problem is of course that the emails only prove you both forgot & doesn't particularly add weight to what you both agreed at the time.

You don't appear to dispute that you agreed to it at the time either, so it wouldn't be particularly honest.

I certainly don't think you have a case against him for dishonestly repaying the same amount when the interest rate dropped, it's one of the recommended ways of paying off a loan quicker.

If you borrowed money from a bank on a tracker and after ten years they said they had originally thought about making you pay a much higher fixed rate but then forgot all about the tracker & want you to pay the higher interest, then I don't think you'd have the same opinion as you do as the lender.